Direct deeding refers to the process by which property is directly deeded from the seller to the buyer. This process is facilitated by a Qualified Intermediary (QI), who handles all of the necessary documentation to ensure that the exchange complies with the requirements of Section 1031 of the Internal Revenue Code and the Treasury Revenue Ruling 90-34.
To elaborate, in a typical 1031 exchange, the exchanger (or taxpayer) sells their old property and uses the proceeds to buy a new, like-kind property, with the intention to defer capital gains taxes. But for the IRS to recognize this transaction as a 1031 exchange, it has to appear as though the exchanger has exchanged their old property for a new one, rather than selling the old property and buying a new one.
The QI ensures this requirement is met by holding the proceeds from the sale of the old property in a trust or escrow account and using those proceeds to purchase the new property on behalf of the exchanger. The QI also handles direct deeding, which is to say, they facilitate the transfer of the deed from the seller of the old property directly to the buyer and the same for the new property.
Direct deeding helps streamline the 1031 exchange process by eliminating the need for the QI to take title to the properties. This can save time and reduces potential complications. The QI never appears in the chain of title and the transaction stays within the guidelines of the 1031 exchange rules.